Classification of costs|:

Classification of cost means, the grouping of costs according to their common characteristics. The important
ways of classification of costs are:
By Nature or Traceability:Direct Costs and Indirect costs. Direct Costs are Directly attributable/traceable to
Cost object. Direct costs are assigned to Cost Object. Indirect Costs are not directly attributable/traceable to
Cost Object. Indirect costs are allocated or apportioned to cost objects.
By Functions: production,administration, selling and distribution, R&D.
By Behavior: fixed, variable, semi-variable. Costs are classified according to their behavior in relation to
change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of
changes in the production volume in given period of time. Variable costs change according to volume of
production. Semi-variable costs are partly fixed and partly variable.
By control ability: controllable, uncontrollable costs. Controllable costs are those which can be controlled or
influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a
conscious management action.
By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business
operations. Abnormal costs arise because of any abnormal activity or event not part of routine business
operations. E.g. costs arising of floods, riots, accidents etc.
By Time: Historical costs and predetermined costs. Historical costs are costs incurred in the past.
Predetermined costs are computed in advance on basis of factors affecting cost elements. Example: Standard
Costs.
By Decision making Costs: These costs are used for managerial decision making.And these are :-
Marginal costs: Marginal cost is the change in the aggregate costs due to change in the volume of output by
one unit.
Differential costs: This cost is the difference in total cost that will arise from the selection of one alternative to
the other.
Opportunity costs: It is the value of benefit sacrificed in favor of an alternative course of action.
Relevant cost: The relevant cost is a cost which is relevant in various decisions of management.
Replacement cost: This cost is the cost at which existing items of material or fixed assets can be replaced. Thus
this is the cost of replacing existing assets at present or at a future date.
Shutdown cost:These costs are the costs which are incurred if the operations are shut down and they will
disappear if the operations are continued.
Capacity cost: These costs are normally fixed costs. The cost incurred by a company for providing production,
administration and selling and distribution capabilities in order to perform various functions.
Sunken cost: cost already incurred
Other costs